The fundamentals of any currency require two things: a means of exchange (ie; acceptance by its users) and a store of value.
Gold has traditionally been a currency because it is extremely rare. That means it can’t be easily “printed” (mined) and thereby debased, which makes it a good store of value. Its status as an element also provides longevity, furthering its qualities as a store of value. Finally, it’s history gives it a solid basis as a universal means of exchange.
And then we have Bitcoins…
Sure, sure – the major currency zones are in the midst of a massive debasement of their monies. The US has printed over $4 trillion in the past few years, Japan has been printing for over a decade and Europe is now heavily into the printing game. This will lead to inflation – it cannot be otherwise. If, say, the output of goods and services remains the same but the monetary base doubles, it is only logical that nominal prices will double.
So the printing game is really a stealth tax, whereby governments steal money from savers by devaluing their savings via printing money to cover their debts and spending.
In such a situation people run for certainty, or anything that looks like certainty in such an uncertain world. That’s why gold has gone through the roof. So have the Aussie and Canadian dollars, because people around the world recognise that Canada and Australia have stable currencies that let you buy stuff in advanced economies filled with cool consumer goods and – more importantly – the currency won’t be printed away by insane monetary policies (yet).
Bizarre as it seems, the fact that Bitcoins cannot be printed means their value has also shot up as people run for monetary cover. There is a (kind of) fixed number of Bicoins, so people have decided to swap their portion of a practically infinite number of dollars, yen and euros for a small portion of a fixed number of Bitcoins. This demand has seen Bitcoins rocket in value. As this increase in value becomes noticed, speculators want in and a spiral takes hold.
Bitcoins are just strings of ones-and-zeros. They have no intrinsic value (like gold). They don’t have universal acceptance (like gold). They have no history as a currency (like gold). Finally, they have no nation-state standing behind them (like the Australian and Canadian dollars). They exist only in an international digital marketplace. If people stop seeing them as a means to store value or that their value has become detached from reality (kind of like a 17th century Dutch tulip), they may decide that Bitcoins are a bit rubbish because, well, they’re just a token digital “currency”, with no history as a currency, no intrinsic value and no nation-state standing behind them. Such a loss of confidence means they will no longer be accepted as a means of exchange. At that point the crash will come – big time.